The first regulation on European long-term investment funds (Eltifs) was published in December 2015, with the first Eltif launched in Luxembourg in 2016, began Silke Bernard, global head of Linklaters’ investment funds practice. As of January 2023, there are 84 Eltifs in Europe, with the majority domiciled in Luxembourg.

But Eltifs didn’t do as well as expected under the Eltif 1.0 regulation, she added. In the past year, there have been “very heavy discussions” between European lawmakers and the industry--lawmakers were interested in hearing about the obstacles and what didn’t work as expected. In November 2022, a final agreement was reached for the Eltif 2.0 regulation, and the final vote in the European Parliament is expected for 14 February--a nice Valentine’s Day gift, noted Bernard.

This update is long-awaited and much needed, added Ronn Henry, a senior structuring professional working within the private wealth structuring business unit at Partners Group, where he focuses on open-ended fund initiatives. “I think the updates that we’re seeing now will hopefully result in an increase in interest in the product,” said Henry. “I think the changes are positive, but some critical aspects still need to be clarified by Esma [European Securities and Markets Authority] in the months to come.”

Risk diversification and the 30-20-10 rule

“In the past, we had a diversification requirement of not more than 10% into one long-term asset,” explained Bernard. But this was difficult for many fund sponsors to achieve, leading many to shy away from Eltifs. “Now that has changed. The new requirement is 20% for Eltifs.” This is much more realistic, she added.

“Essentially, you can view it as a 30-20-10 rule,” said Henry. This means that an Eltif may acquire no more than 30% of the units or shares of a single Eltif, EuVECA (European venture capital fund), EuSEF (European social entrepreneurship fund), Ucits or an EU AIF managed by an EU alternative investment fund manager (AIFM). An Eltif can invest no more than 20% of its capital in units or shares of any single Eltif, EuSEF, EuVECA, Ucits or EU AIF managed by an EU AIFM.

And finally, an Eltif is allowed to invest in units or shares of one or several other Eltifs, EuVECas, EuSEFs, Ucits and EU AIFs, provided these target funds themselves invest in Eltif-eligible investments and have not themselves invested more than 10% of their assets in any other UCI. The 30% and 20% limits are not applicable to structures or, in some cases, when Eltifs are marketed solely to professional investors, while the 10% limit is not applicable to feeder Eltifs.

A “key takeaway,” said Henry, “is the expansion of the qualified portfolio undertakings.” This now includes Ucits (Undertakings for the Collective Investment in Transferable Securities) and AIFs (alternative investment funds) specifically--“this wasn’t a provision in the 1.0 rules.”

Target funds now eligible

“Target funds are now eligible,” noted Bernard, and this is “really great news. That will very much open Eltifs to a much larger public.” Retail investors in certain countries are used to fund of funds, or basket, solutions. “They like that, because you can very quickly get access to a whole existing portfolio of underlying assets. And that is something that works really well.”

Clarifications of definitions

Some of the definitions in the past have been clarified. “For instance, real assets, there was a strange definition which referred to some policy objectives--that has been taken out,” said Bernard. Some of the thresholds of the assets for the eligibility have been taken out, some other assets have been added. For instance, fintechs are now eligible--that is interesting.”

All these points of putting the reality into the text are really helpful to create credibility and also reliability of the Eltif text going forward.

Silke Bernard, global head of investment funds practice, Linklaters

“So there are a number of things which have been brought, as I would call it, closer to reality, or closer to the market,” said Bernard. Certain things have come closer to the reality of asset managers.

Past requirements regarding third country investments also created obstacles.  But the text “very helpfully, it has now been clarified, beyond any doubt, that an Eltif can invest outside the EU, under certain conditions of course, like tax exchange of information,” explained Bernard. “It is even clarified that the majority of assets can be outside the EU--that has always been a point of doubt in the past, so now it’s clear, and that is really helpful.”

Looking at the investor side, opening to retail clients

In the past, the investor side was one point that was seen as “holding back” Eltifs. “Eltifs were considered not to be attractive, neither to investors, retail investors, nor to distributors. So that was a big problem,” said Bernard. Under the Eltif 1.0 legislation, there were certain thresholds and specific suitability tests, for example.

“So what we have now for retail investors is a pretty broad and general alignment to the Mifid [markets in financial instruments directive] rules, which is really helpful, because then distributors just have one set of rules to apply,” declared Bernard. The special suitability assessment and thresholds have gone away. Furthermore, there’s also the possibility now for investors who wish to invest--despite negative investment advice--in an Eltif.

What about ESG criteria and Eltifs?

A question from a participant concerned sustainability requirements for real assets. After quite some discussions, said Bernard, this has been clarified. “It is even clarified that there are no specific ESG requirements for real estate investments,” she said. During the lawmaking process, there was an “attempt” to create Eltifs with specific ESG requirements--what Bernard called a “green Eltif.”

“At the end of the day, this was rejected,” Bernard explained. “It was too early to create a special regime, alongside SFDR [sustainable finance disclosure regulation] and taxonomy and so on, for specific Eltif ESG criteria. So they will review it, and I think the review period for that is two years. So in two years, they will look again at whether they want to create green Eltifs as a special category, with a special label.”

Bright future for Eltifs

“I think all these points of putting the reality into the text are really helpful to create credibility and also reliability of the Eltif text going forward,” said Bernard. There’s “a very bright future ahead for Eltifs.”

“The Eltif, at the end of the day, is a product meant for retail investors,” Henry said. “And one of the questions from the audience here is--why would a retail investor invest in a product which has a very extended duration. But as mentioned, I think with the changes under the 2.0 regime that stands to change as managers offer greater liquidity.”

“Additionally, it gives retail investors an opportunity to participate in private markets,” said Henry. This contributes to the democratisation of the private markets sector and assets.

“Eltif 2 could be a very nice and positive tool for the democratisation of the private markets and assets,” said LPEA CEO , who gave the opening remarks at the webinar. “That’s why we should really look into that, embrace it, be a frontrunner as Luxembourg’s funds hub and see how far it will bring us in that direction.”